Misrepresenting, or omitting material
facts, is the classic type of securities fraud. This type
of violation occurs more during the offering process, where
a company is selling its stock and is accused of making a
misrepresentation on the offering documents The claim does
arise in regulatory actions and arbitrations, but is typically
a less frequent event in the retail sales practice violations.
Here the customer alleges that the
broker intentionally misled him or failed to disclose a material
fact about an investment. While Courts require proof that
the broker acted intentionally or recklessly, arbitration
panels often use the level of sophistication of the customer
in deciding whether he was misled. Here, as in most of these
claims, the credibility of the customer, and the broker are
crucial to the arbitration process, and, as discussed in Avoiding
Customer Disputes, the documentation maintained by the
parties may be determinative of the outcome.
If proven, an intentional misrepresentation
claim can have serious consequences for the broker, as it
is a violation of Rule 10b-5, and a matter taken very seriously
by the regulators. A serious enough violation could lead to
more information, see Typical
Customer Disputes at the Securities
Law Home Page.